NPF - NATIONAL PROVIDENT FUND - TABLING OF THE FINAL REPORT OF THE COMMISSION OF INQUIRY INTO THE NATIONAL PROVIDENT FUND

by

RT HON SIR MICHAEL SOMARE GCMG CH
PRIME MINISTER

NATIONAL PARLIAMENT, WEDNESDAY 20 NOVEMBER 2002

Mr Speaker,

I rise to table the findings of the Commission of Inquiry into the National Provident Fund that was established in April 2000, after a special audit report showed that the NPF had suffered enormous losses in excess of K155 million, that it had failed to honour its reporting obligations and that it faced a 50 per cent write down in members funds.

There was also an indication that there had been gross abuses regarding an attempt to sell some property known as the Waigani land to NPF at a grossly excessive price and similar abuses regarding the construction and attempted sale of the NPF Tower (now known as the Deloittes Tower).

The Commission was established with wide terms of reference to examine all NPF’s equity investments, its purchases and management of a company called Crocodile Catering (PNG) Pty Ltd and other investments.

The Commission was asked to examine the conduct of the NPF Trustees and management to see if there were breaches of duty and other abuses and to look specifically at the Waigani land deal and the NPF Tower.

Finally, the Commission was asked to report upon the legislative structure governing the NPF and to make recommendations for structural reform.

The first Chief Commissioner, Sir Charles Maino, resigned early in the piece to contest a by-election and he was replaced with former National and Supreme Court Judge, Mr Tos Barnett. The other Commissioners were Lady Whilhemina Siaguru and Mr Donald Manoa.

The Commissioners, with Mr John Reeve as Senior Counsel assisting the Commission, set about their investigations vigorously calling in documents on 34 major topics to be investigated as well as summonsing hundreds of witnesses to give evidence.

In order to be transparent, the Commission published the Transcript of its daily hearings on the Prime Minster’s website, and gave everyone implicated an opportunity to appear and be heard.

The Commission has found that the losses suffered by the Fund were even worse than has been suspected.

The report, states that by far the main cause of the losses was NPF’s outrageous investment strategy during the 5 years under review by the Commission - 1995 to 1999. Under the chairmanship of Mr David Copland (former managing director of Steamships Trading Company Limited) NPF formulated a policy to borrow massively from the commercial banks to fund its investments in PNG resource stock, mining and exploration companies.

It bought into these investments when prices were high and it borrowed the funds when the interest rate was low. But these were volatile, risky, non-income producing investments and their price was about to tumble as the South East Asian financial crisis of 1997 - 1998 loomed.

The report also states that the NPF also invested more than K40 million of borrowed funds in a doomed attempt to take over Steamships Trading Company and Collins & Leahy Holdings, paying top market price for the stock, which was also about to fall in value.

Then three things happened: -

1. the share prices fell;
2. the interest rate on NPF’s borrowed funds rose and
3. the Kina depreciated against the Australian dollar.

NPF was trapped. As its interest rate burden rose to K1 million per month, it was obliged to transfer more and more share scrip to the banks for security.

Much of this debt was with the ANZ Bank. Just as it was becoming difficult to meet the interest payments and to honour the agreement with ANZ about the value of shares pledged as security, NPF borrowed a further K40 million from PNGBC to construct the NPF Tower.

According to the report, the NPF’s management failed to perform due diligence in relation to the investments and failed to keep the NPF Board of Trustees informed. Frequently management acquired shares without the Board’s authority and also entered agreements without authority.

The Commission has found that NPF’s senior officers - the managing directors, Messrs Robert Kaul and Henry Fabila, the Investment Advisor, Mr Noel Wright and the Corporate Secretary/Legal Adviser, Mr Herman Leahy, were in breach of duty and suggests that in some instances the actions of some of them were criminal.

The Commission has made recommendations that many people be referred to the Ombudsman Commission and some to the Commissioner of Police for further investigations.

Similarly, it has found that the Trustees are in breach of their fiduciary duty to the members for not keeping management in check and for not seeking independent expert advice before investing multi millions of Kina in risky stock.

The commission also found that the NPF management and Trustees ignored and sometimes deliberately violated the Investment Guidelines, which were laid down by Sir Julius Chan in 1993. These were designed to make sure that this superannuation fund (NPF) invested members’ funds carefully and prudentially.

One of the strangest things found by the Commission is that NPF never had the power to borrow money in the first place. The banks failed to make proper inquiries and made these vast loans, which were illegal and probably not recoverable.

When NPF’s cash crisis had brought it to the verge of bankruptcy it was obliged to sell off its assets to repay the debt, which it could no longer service. By that time, however, the share price for NPF’s narrow range of PNG resource stock was very low and when NPF tried to sell down large volumes of those shares, it brought the price down even further so that NPF realised massive losses.

The Commission has reported that while NPF was facing and addressing this crisis in 1999, its newly appointed chairman Mr Jimmy Maladina and the Legal Officer, Mr Herman Leahy (assisted by the late Mr Henry Fabila) set about defrauding the NPF of some K5 million by means of the Waigani land fraud, which the Commissioners say involved the bribery of Lands Ministers Viviso Seravo and Dr Fabian Pok and Lands Board Chairman, Mr Ralph Guise.

The Commission has laid out the evidence against these people in Schedules 5 & 6 and many others in great detail - most of it documented - and has recommended that I should refer them to the Commissioner for Police and to the Ombudsman Commission.

The Commission’s report includes charts, which trace the trail of money from the original fraudulent payments through many transactions and in and out of the books of Carter Newell Lawyers and Port Moresby First National Real Estate, to the ultimate beneficiaries, their families and companies.

Each transaction shown on the charts carries the paragraph number in the Schedule where that transaction is described.

Although the amounts lost to NPF from criminal activities are said to amount to only about K5 million of the approximately K170 million losses, it is still a significant sum which the Commission has found was stolen from NPF by those responsible for managing and safeguarding the members assets.

The Commission has presented tables of all those persons it has recommended that I should refer to the Commissioner for Police or to the Ombudsman Commission, the Law Society and other professional bodies.

I now commend this report to the house and call on the appropriate authorities to take action forthwith.